How India’s high-quality, low-cost model can save American healthcare

While US healthcare companies struggle to make profits from the wealthiest patients and shun the rest, Indian healthcare companies are launching successful IPOs and attracting global investment dollars. How? With innovations that drastically reduce costs while preserving or even raising value.

At first glance, Indian healthcare seems an unlikely place to invest. Physician density in India is less than one-third that of the US, and nurse density is roughly one-sixth. The infant mortality rate is almost seven times that of the US and more than four times that of China, and less than 5% of Indians who need heart surgery will receive it.

Yet, India has a handful of for-profit hospital systems that can be widely adopted not only in other poor countries but also in struggling healthcare systems in the developed world.

Take the example of Narayana Health, which began 18 years ago as a private, for-profit heart hospital in Bengaluru and now has 25 hospitals delivering care in 30 medical specialties. It charges about $3,000 for a typical heart surgery, tens of thousands of dollars less than in the US, and its 30-day mortality rate is lower than that in the US.

The company performs 60% of its pediatric surgeries for free or at a steep discount, covering those costs with money made on full-pay patients. And yes, there are profits. Its December 2015 IPO was oversubscribed 8.6 times, raised $100 million in India, and in 2017, its market capitalisation was over $1 billion.

Another example is HCG Oncology, which gives away or subsidises care to 20% of its patients and went public in 2016 with a market valuation of $276 million.

Aravind Eye Care System also makes money on high-quality, low-cost care. Since it was founded in 1976, the hospital chain has provided free or highly subsidised eye surgery to 3 million people — half of its surgical patients — and with no more complications than Britain’s National Health Service.

Over the years, Aravind has garnered a net surplus equal to between 35-50% of revenues. Remarkably, since its inception, it has covered the cost of all its free medical care and capital expansion out of operating surpluses. Although it was a not-for-profit hospital and served the highest proportion of free or subsidised patients among the hospitals we studied, its EBITDA margin and net profit margin were the highest in our sample. LV Prasad Eye Institute enjoyed similar success, covering all its operating costs as well as its training and research expenses, with money left over each year.

Our study suggests that to promote innovations in healthcare delivery, an environment like India’s is just what the doctor ordered. First, India’s huge, poor, and largely uninsured population offers an untapped market of price-conscious consumers. Second, the country’s severe shortage of doctors and medical facilities demands that health-care resources be used as productively as possible. And third, India’s emerging health-care market is largely unburdened by legacy pressures that hinder innovation in more developed countries, including government regulation, the fee-for-service reimbursement model, the influence of powerful insurance and pharmaceutical lobbies, or other forms of organised resistance.

The relatively free rein of India’s healthcare market forces the country’s innovators to cut costs and sharpen efficiencies in radical ways. At Narayana, for example, certain surgical clamps are professionally sterilised and reused — as permitted by the US accrediting agency — but in the US they are routinely thrown away after one use.

At Aravind, highly optimised processes allow its surgeons to perform five-six surgeries per hour compared to one per hour in the US. HCG operates its expensive MRI machines 24/7, offering discounts for night appointments. When a multinational supplier of hospital gowns refused to budge on a high quote, Narayana partnered with a local manufacturer to make gowns for a fraction of the price. Everyone benefits from the high volume resulting from the combination of free and paying patients, reaping significant economies of scale.

The hospitals we studied also use an operationally efficient hub-and-spoke delivery network that treats less demanding cases in regional clinics and funnels serious surgeries to specialists in well-equipped medical centres. They take task-shifting to extremes, maximising every minute of service from highly paid specialists and delegating less specialised work to lower paid staff and even to patients’ family members, who are trained to deliver care both in the hospital and upon discharge.

Could these innovations work in more developed countries? To some extent, yes. In fact, we have seen several promising experiments in Indian-like delivery methods take root in the US. And frugality, a universal mindset in India, is certainly returning to first world hospitals, because it has to.

From a more global perspective, all of the for-profit hospitals we saw in India could thrive in much of the developing world. Some are already there, and others are on their way. CARE Hospitals, a Hyderabad-based low-price cardiac chain, was bought in 2016 by a profit-minded Dubai-based group, which hopes to transplant CARE’s business model to Africa. Aravind has conducted community ophthalmology training in 30 countries, and Narayana Health set up a 104-bed hospital in Grand Cayman four years ago. So far, the facility has treated patients primarily from the Caribbean and Central America, but Narayana is clearly waiting for Americans to take advantage of the savings that are only a short plane ride away.

(Govindarajan and Ramamurti are authors of a new book, Reverse Innovation in Health Care: How to Make Value-Based Delivery Work)

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